Buying Multi Family with a partner & one partner lives in a unit
Real Estate Broker · Vancouver, WA · Member since 2016 · 96 posts · 31 votes
Buying Multi Family with a partner & one partner lives in a unit
Most Popular Reply
G. Brian DavisPro Member
Investor · Hatboro, PA · Member since 2016 · 3k+ posts · 884 votesHi @Daniel Jodrey nice to meet you here on BP! Buying a duplex with a partner is absolutely ok, but the live in dynamic definitely requires a clear framework. In my experience co-founding a co investing club, the most successful partnerships focus on planning for the "what ifs" from day one.
the cleanest way to handle the living situation is to have the resident partner pay fair market rent to a joint LLC. This keeps the books simple and ensures both partners are treated as equal owners. You should definitely work with a lawyer to customize an operating agreement that covers exit strategies, buy sell provisions, and how you will handle unexpected repairs or capital calls.
It is also vital to plan for the tax implications since the IRS treats the owner occupied side differently than the rental side when it comes to depreciation recapture later on.
7 Replies
- 8moGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
This arrangement has the potential to be disastrous because if your partnership falls apart, you not only have a partnership, one of you is affected disproportionately because it is also your home.
To maximize success, have your contract address all the worst-case scenarios you can think of.
- At some point you decide you hate each other. How do you break up the partnership? Can your friend continue living there? Who makes the decisions? What if you don't agree on a decision? Who controls the money? What happens if you think something funny is happening with the money?
- Someone dies. Who controls the property? The decisions? Who can inherit the shares?
- Someone gets married. How does that affect the partnership?
- Someone gets married then dies. Is the spouse your new partner?
I'm not a lawyer but it would seem to me having two LLCs involved would complicate this issue immensely. It would probably be cleaner to have one LLC and have the operating agreement of the LLC address all the issues noted above.
- Real Estate Broker · Vancouver, WA · Member since 2016 · 96 posts · 31 votes8mo
Hello @Greg Scott
I appreciate all of what you said, and understand what you are saying as well as the risks. Forming an LLC seems like a must, and something I will dive deep into now - and along with the LLC, outlining all scenarios you had mentioned.
This may be a silly question - but is there a type of template or structure outlining the LLC agreement for a typical Real Estate Investment Partnership- or somewhere that I can go to look up more information on what is needed and best practices to put in place. I imagine a Lawyer would assist in this, but not sure if their role would help to develop the plan or just to prepare the documents.
The idea is we would be having one party live in the duplex in order to allow Owner Occupied financing (lower down payment and interest rate so long as owner occupied for 1 year) and the party would live there for the one year. Once the year is complete, the party either moves out and we rent each side, or they would stay and begin paying the full rent of that unit.
- 8moGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesAn LLC cannot qualify for owner-occupied financing! Some will tell you could put the property in the LLC after you get the financing. I've heard attorneys argue that is clear violation of the integrity of the LLC (and pierces the corporate veil). In those circumstances the LLC is thrown out and no longer provides you any protection whatsoever.
Quote from @Daniel Jodrey:
Hello @Greg Scott
I appreciate all of what you said, and understand what you are saying as well as the risks. Forming an LLC seems like a must, and something I will dive deep into now - and along with the LLC, outlining all scenarios you had mentioned.
This may be a silly question - but is there a type of template or structure outlining the LLC agreement for a typical Real Estate Investment Partnership- or somewhere that I can go to look up more information on what is needed and best practices to put in place. I imagine a Lawyer would assist in this, but not sure if their role would help to develop the plan or just to prepare the documents.
The idea is we would be having one party live in the duplex in order to allow Owner Occupied financing (lower down payment and interest rate so long as owner occupied for 1 year) and the party would live there for the one year. Once the year is complete, the party either moves out and we rent each side, or they would stay and begin paying the full rent of that unit.
Any templated LLC will not likely be very useful for your specific situation.
I'm not trying to be critical; I am simply offering a framework for thinking about it. If you truly need the protection of an LLC, you would be willing to pay for it. You would have a lawyer write up the LLC. You would be willing to take on the terms of non-owner occupied financing. If paying for all that structure seems too expensive, you are probably not a prime lawsuit target anyway. Instead, you may want to look at beefing up your insurance coverage and use a lawyer just for your partnership agreement. FWIW, you could probably have AI do a draft to reduce billable hours from an attorney. - Real Estate Broker · Vancouver, WA · Member since 2016 · 96 posts · 31 votes8moRight, as soon as I posted I realized buying under an LLC would not be able to do owner occupied financing.
Quote from @Greg Scott:
An LLC cannot qualify for owner-occupied financing! Some will tell you could put the property in the LLC after you get the financing. I've heard attorneys argue that is clear violation of the integrity of the LLC (and pierces the corporate veil). In those circumstances the LLC is thrown out and no longer provides you any protection whatsoever.Quote from @Daniel Jodrey:
Hello @Greg Scott
I appreciate all of what you said, and understand what you are saying as well as the risks. Forming an LLC seems like a must, and something I will dive deep into now - and along with the LLC, outlining all scenarios you had mentioned.
This may be a silly question - but is there a type of template or structure outlining the LLC agreement for a typical Real Estate Investment Partnership- or somewhere that I can go to look up more information on what is needed and best practices to put in place. I imagine a Lawyer would assist in this, but not sure if their role would help to develop the plan or just to prepare the documents.
The idea is we would be having one party live in the duplex in order to allow Owner Occupied financing (lower down payment and interest rate so long as owner occupied for 1 year) and the party would live there for the one year. Once the year is complete, the party either moves out and we rent each side, or they would stay and begin paying the full rent of that unit.
Any templated LLC will not likely be very useful for your specific situation.
I'm not trying to be critical; I am simply offering a framework for thinking about it. If you truly need the protection of an LLC, you would be willing to pay for it. You would have a lawyer write up the LLC. You would be willing to take on the terms of non-owner occupied financing. If paying for all that structure seems too expensive, you are probably not a prime lawsuit target anyway. Instead, you may want to look at beefing up your insurance coverage and use a lawyer just for your partnership agreement. FWIW, you could probably have AI do a draft to reduce billable hours from an attorney.
Our goal would be to owner occupy finance with the partner - move out in a year and get both sides rented and then repeat.
- 8moG. Brian DavisPro MemberInvestor · Hatboro, PA · Member since 2016 · 3k+ posts · 884 votes
Hi @Daniel Jodrey nice to meet you here on BP! Buying a duplex with a partner is absolutely ok, but the live in dynamic definitely requires a clear framework. In my experience co-founding a co investing club, the most successful partnerships focus on planning for the "what ifs" from day one.
the cleanest way to handle the living situation is to have the resident partner pay fair market rent to a joint LLC. This keeps the books simple and ensures both partners are treated as equal owners. You should definitely work with a lawyer to customize an operating agreement that covers exit strategies, buy sell provisions, and how you will handle unexpected repairs or capital calls.
It is also vital to plan for the tax implications since the IRS treats the owner occupied side differently than the rental side when it comes to depreciation recapture later on.
- Real Estate Broker · Vancouver, WA · Member since 2016 · 96 posts · 31 votes8mo
Nice to meet you @Brian G.!
Appreciate your time and thoughts. I know that we would definitely want to structure a partnership/agreement with a lawyer and have every situation we can think of outlined. If we did have a LLC together, we wouldn't buy the property under the LLC because we would want to utilize owner occupied financing terms. Would we still have a set aside LLC and pay into that? I have read and as others have mentioned, that transferring property into a LLC through a Quitclaim deed could nullify the protection the LLC offers.
The goal is to have the party that resides there only live for 1 year to suffice the owner occupied requirements and then to have the party move out and we rent out both sides then. It just becomes a bit tricky having a partnership in this situation and only one party is the owner occupy for that 1 year.We are discussing for that one year period - Does it make sense (in terms of the partnership) that the remaining mortgage to be paid, after subtracting out the rental income from the other unit, be split between the partners.( Example: total mortgage is $4000 and we are getting $2000 from the other side being rented. Therefore each party is to pay $1000 each) . We would only do this for the 1 year period . What is your thoughts on this?
- 7moBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
This is messy and I would not recommend it.
Your partner will be living in one unit - Is he expected to pay rent that will be split 50% / 50%
What if you think the value of his unit has increased, will you be able to effectively communicate with him to pay more(or get less of a return?).
You will need to buy the property in both names or in an LLC owned by both people.
If you buy it in one person's name, you risk the issue of one member dying(the one with title) and the property passing on to his heirs and the other person getting nothing.
I would suggest to keep it simpler - buy the property and have no one live in the property.
Basit Siddiqi CPA4.880 Reviews
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